PNC Financial Services Group Inc
NYSE:PNC
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
128.7
211.04
|
| Price Target |
|
We'll email you a reminder when the closing price reaches USD.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
PNC Financial Services Group Inc
Earnings Call Analysis
Q2-2024 Analysis
PNC Financial Services Group Inc
PNC Financial Services Group reported a robust performance in the second quarter of 2024, generating $1.5 billion in net income, translating to $3.39 per share. This success was partly driven by a notable $754 million gain from Visa Class B shares, though other financial strategies, such as securities repositioning, balanced these gains. The leadership is optimistic about achieving record net interest income (NII) in 2025.
For the first time in six quarters, net interest income increased, marking the start of what is expected to be a steady rise. NII grew by $38 million or 1% during the quarter. Looking ahead, PNC anticipates further growth in NII, driven by higher yields on interest-earning assets and strategic financial repositioning actions.
PNC successfully expanded its customer base, particularly in new and emerging markets. The launch of the competitive PNC Cash Unlimited credit card and plans for additional cards in the future exemplify their strong retail strategy. Business and corporate banking also saw impressive gains, with new client acquisitions outpacing historical rates.
Operating expenses increased by only 1% to $3.4 billion, thanks to disciplined cost management and the company's continuous improvement program. PNC raised its target for this program to $450 million for 2024, reflecting the ongoing commitment to expense control amid technological investments.
Despite challenges in the commercial real estate (CRE) office portfolio, overall credit quality remained stable. Provision for credit losses was $235 million, which the company regards as adequate. PNC also strengthened its capital levels, maintaining a CET1 ratio of 10.2% at the end of the quarter. Their resilience was further demonstrated by strong results in the Federal Reserve stress tests, maintaining the regulatory minimum stress capital buffer of 2.5%.
For the third quarter of 2024, PNC expects stable average loans, a 1-2% rise in NII and fee income, and noninterest income (excluding significant items) to range between $150 to $200 million. Despite the muted loan growth assumption, the company remains positive about improved deposit dynamics and strategic securities repositioning that are expected to support income and growth.
PNC forecasts full-year 2024 average loans to be down by less than 1%, yet expects NII to be down approximately 4% overall, aligned with their high-end projections. Noninterest income is anticipated to rise by 3-5%, driven by better-than-expected deposit behaviors and securities adjustments. Total revenue is projected to fall 1-2%, and the core noninterest expense to decrease by about 1%. The effective tax rate is estimated to be approximately 18.5%.
PNC remains confident in navigating the economic landscape, forecasting steady economic growth with an expected 2% real GDP growth for 2024, and a slight increase in unemployment rates to just above 4%. They anticipate two Federal Reserve rate cuts in 2024, reinforcing their strategy to leverage economic conditions favorably.
The company continues to return capital to shareholders, with approximately $700 million distributed during the quarter, including $600 million in dividends and $100 million in share repurchases. The Board approved a $0.05 increase in the quarterly cash dividend, raising it to $1.60 per share, reflecting confidence in the company's long-term financial health and strategy.
During the quarter, PNC undertook significant financial maneuvers, including the sale of $4.3 billion in securities and reinvestment into higher-yielding assets. This repositioning is expected to add $80 million to the 2024 NII, with a full payback period of less than four years, demonstrating strategic balance sheet management to bolster future earnings.
You don't have any saved screeners yet
Greetings, and welcome to the PNC Financial Services Group Second Quarter 2024 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Bryan Gill. Thank you, Bryan. You may begin.
Well, good morning, and welcome to today's conference call for the PNC Financial Services Group. I am Bryan Gill, the Director of Investor Relations for PNC, and participating on this call are PNC's Chairman and CEO, Bill Demchak; and Rob Reilly, Executive Vice President and CFO.
Today's presentation contains forward-looking information. Cautionary statements about this information as well as reconciliations of non-GAAP measures are included in today's earnings release materials as well as our SEC filings and other investor materials. These are all available on our corporate website, pnc.com, under Investor Relations. These statements speak only as of July 16, 2024, and PNC undertakes no obligation to update them.
Now I'd like to turn the call over to Bill.
Thank you, Bryan, and good morning, everyone. As you've seen, we had a strong second quarter, and we generated $1.5 billion in net income or $3.39 diluted earnings per share. Our results included a gain on a portion of our Visa Class B shares, which was substantially offset by other items in the quarter, including the securities repositioning. Rob is going to provide more details on that Visa gain, financial results and outlook in a second, but I'll highlight a few items.
First off, net interest income has moved past its trough, and both NII and NIM grew in the quarter. And by the way, this would've occurred independent of the $10 million impact that we got from the securities repositioning. Importantly, we are on a growth trajectory towards expected record NII in 2025.
We continue to add new customers and see strong business momentum across our franchise, particularly in the new and expansion markets. DDA growth accelerated in our branches, and we continue to add new corporate and commercial banking clients above historical rates.
In our Retail business, we launched our first new credit card in several years, PNC Cash Unlimited, a highly competitive card that offers 2% back on all purchases. We plan to launch several new cards in the months and year ahead. Average deposits held relatively flat to the first quarter levels, a little bit ahead of our expectations.
And our expenses remained well-controlled, and we generated positive operating leverage during the second quarter. Rob's going to touch on this in a minute, but we have increased our continuous improvement program target for 2024 as expense discipline remains a top priority.
The credit environment continues to play out as we've expected, including an increase in charge-offs within the CRE office portfolio where we remain adequately reserved. Outside of CRE office, credit quality remains relatively stable.
Finally, we further strengthened our capital levels during the quarter. Our strong balance sheet allows us to continue supporting our customers and communities, investing in our business and people and delivering returns for shareholders.
Our financial strength and stability are also reflected in the latest results from the fed stress test in which we maintained our stress capital buffer at the regulatory minimum of 2.5%. And importantly, for the second year in a row, PNC has had the lowest start-to-trough capital depletion in our peer group, further demonstrating our best-in-class resiliency. With this in mind, our Board recently approved an increase in our quarterly stock dividend by $0.05.
In summary, we delivered strong results in the second quarter and are well-positioned to drive further growth and expansion into 2025 and beyond. Before I turn it over to Rob, as always, I just want to thank our employees for everything they do for our company and our customers.
And with that, I'll turn it over to Rob to take you through the quarter. Rob?
Thanks, Bill, and good morning, everyone. Our balance sheet is on Slide 4 and is presented on an average linked quarter basis. Loans of $320 billion were stable. Investment securities increased $6 billion or 4%, and our cash balances at the Federal Reserve were $41 billion, a decrease of $7 billion or 15%, primarily reflecting the deployment of cash into higher-yielding securities. Deposit balances averaged $417 billion, a decline of $3 billion or less than 1% due to a seasonal decline in corporate balances. Borrowed funds increased $2 billion or 2% and were 15% of total liabilities.
At quarter end, AOCI was negative $7.4 billion and improved $600 million compared with March 31. Our tangible book value increased $89.12 per common share, a 4% increase linked quarter and a 15% increase compared to the same period a year ago. We remain well-capitalized, and our estimated CET1 ratio increased to 10.2% as of June 30.
Regarding the Basel III endgame, we expect the inclusion of AOCI in the final rule, and our CET1 ratio with the impact of AOCI would be 8.7%. And while we recognize the likelihood of changes to certain other aspects of the Basel III endgame NPR, under the currently proposed capital rules, our estimated fully phased-in expanded risk-based CET1 ratio would be approximately 8.4%.
We continue to be well-positioned with capital flexibility. We returned roughly $700 million of capital to shareholders during the quarter, which included $600 million in common dividends and $100 million of share repurchases. And as Bill just mentioned, our Board recently approved a $0.05 increase to our quarterly cash dividend on common stock, raising the dividend to $1.60 per share.
Our recent CCAR results underscore the strength of our balance sheet. And as previously announced, our current stress capital buffer remains at the regulatory minimum of 2.5% for the 4-quarter period beginning in October 2024.
Slide 5 shows our loans in more detail. Compared to the first quarter, average loan balances were stable. Commercial loans were essentially flat as utilization remains well below both the prepandemic historical average of roughly 55% and the second quarter 2023 level of 52.5%. Importantly, we continue to grow customer relationships, and C&IB loan commitments increased during the second quarter.
Although the direction of the near-term economy remains uncertain, CapEx to sales levels and inventory growth rates remain below historical averages, both of which are typically leading indicators of eventual commercial loan growth. Average consumer loans declined approximately $600 million or less than 1%, driven by lower residential real estate and home equity loan balances. And the yield on total loans increased 4 basis points to 6.05% in the second quarter.
Slide 6 details our investment security and swap portfolios. Average investment securities of $141 billion increased $6 billion or 4%, reflecting the deployment of excess liquidity into higher-yielding securities, primarily U.S. treasuries. The securities portfolio yield increased 22 basis points to 2.84%, driven by higher rates on new purchases. As of June 30, the securities portfolio duration was 3.5 years.
During the second quarter, our forward starting swaps increased to $18 billion. With the addition of these swaps, we've locked in a portion of our fixed rate asset repricing through 2025 at a level that is approximately 300 basis points higher than maturities. The total weighted average received fixed rate of our swap portfolio, including the forward starters, increased 83 basis points to 3.13%, and the duration of the portfolio is 2.2 years.
Slide 7 highlights the securities repositioning we executed during the second quarter. We sold securities with a book value of $4.3 billion, and a market value of $3.8 billion. We recognized a $497 million loss on the sale and reinvested the $3.8 billion of proceeds into securities with yields approximately 400 basis points higher than the securities sold. The repositioning is expected to benefit our net interest income by $80 million in 2024, with roughly $10 million of that being realized in the second quarter, and the estimated earn-back period for this transaction is less than 4 years.
Turning to Slide 8. We expect considerable runoff of low-yielding securities and swaps through the end of 2026, which will allow us to continue to reinvest into higher-yielding assets, providing a meaningful benefit to net interest income. Accumulated other comprehensive income improved to negative $7.4 billion on June 30 compared to negative $8 billion on March 31. The improvement was primarily due to the securities repositioning. AOCI will continue to accrete back as our securities and swaps mature, resulting in further growth to tangible book value.
Slide 9 covers our deposits in more detail. Average deposits declined $3 billion or 1%, reflecting seasonally lower corporate balances. Regarding mix, consolidated noninterest-bearing deposits were 23% of total deposits in the second quarter, down less than 1 percentage point from the first quarter.
Additionally, average noninterest-bearing deposits had the smallest dollar decline in the second quarter of 2024 since the fed began raising rates in 2022, which gives us confidence that the noninterest-bearing portion of our deposits has largely stabilized. And our rate paid on interest-bearing deposits increased by only 1 basis point during the second quarter to 2.61%. We believe our rate paid on deposits is approaching its peak level, but we do expect some potential drift higher as interest rates remain elevated.
Turning to the income statement. And as Bill mentioned, there were several significant items in the quarter, and I want to provide a bit more detail. Taken together, these significant items have a minimal impact to our earnings per share totaling to a net EPS benefit of $0.09.
As we've previously disclosed, we participated in the Visa exchange program, allowing us to monetize 50% of our Visa Class B-1 shares and convert our remaining holdings to 1.8 million Visa Class B-2 shares. Through the exchange, we recognized a $754 million pretax gain.
In addition, we had significant items that occurred in the second quarter that largely offset the gain, and they are as follows. First, as I mentioned earlier, we repositioned a portion of our securities portfolio and, through the sale of certain low-yielding securities, recognized a $497 million loss. Second, we recorded a negative $116 million Visa derivative fair value adjustment associated with Visa Class B-2 shares, primarily related to the extension of anticipated litigation resolution. And lastly, we recognized $120 million PNC Foundation contribution expense. The foundation supports our communities and early childhood education.
Turning to Slide 11, we highlight our income statement trends. Second quarter net income was $1.5 billion or $3.39 per share. Total revenue of $5.4 billion increased $266 million or 5% compared to the first quarter of 2024. Net interest income grew by $38 million or 1% in the second quarter. Notably, this is the first time NII has increased in 6 quarters, marking the beginning of an expected upward trajectory. And our net interest margin was 2.6%, an increase of 3 basis points.
Noninterest income increased $228 million or 12% and included $141 million of the significant items I previously detailed. Noninterest expense of $3.4 billion increased $23 million or 1% and included the $120 million foundation contribution expense. Notably, we generated positive operating leverage in both the linked quarter and year-over-year comparisons. Provision was $235 million in the second quarter, reflecting portfolio activity, and our effective tax rate was 18.8%.
Turning to Slide 12, we highlight our revenue trends. Second quarter revenue was up $266 million or 5%, driven by higher noninterest income and net interest income. Net interest income of $3.3 billion increased $38 million or 1%, driven by higher yields on interest-earning assets. Fee income was $1.8 billion and increased $31 million or 2% linked quarter.
Looking at the detail, asset management and brokerage noninterest income was stable linked quarter as the benefit of higher average equity markets was offset by lower annuity sales due to elevated first quarter activity. Capital markets and advisory fees increased $13 million or 5%, driven by higher M&A advisory activity and loan syndications, partially offset by lower underwriting fees.
Card and cash management increased $35 million or 5%, reflecting seasonally higher consumer transaction volumes and higher treasury management fees. Mortgage revenue declined $16 million or 11%, primarily due to lower residential mortgage activity. Other noninterest income of $332 million increased $197 million and included $141 million related to this quarter's significant items.
Turning to Slide 13. Our noninterest expense of $3.4 billion was well-controlled, increasing by only $23 million or 1%. Expenses for the second quarter included the $120 million contribution to the PNC Foundation,while the first quarter of 2024 included $130 million FDIC special assessment. Importantly, noninterest expense, excluding the foundation contribution, declined $135 million or 4% compared with the second quarter of 2023. Notably, personnel declined as a result of the workforce reduction actions we took last year.
As Bill mentioned, we remain diligent in our continuous improvement efforts. At the beginning of the year, we set a continuous improvement program goal of $425 million. Recently, we've identified initiatives that support increasing our CIP by an additional $25 million, raising our full year target to $450 million. As you know, this program funds a significant portion of our ongoing business and technology investments.
Our credit metrics are presented on Slide 14. Nonperforming loans increased $123 million or 5% linked quarter, primarily driven by an individual secured loan within our asset-based lending business. Total delinquencies of $1.3 billion were stable with March 31. Net loan charge-offs were $262 million in the second quarter and included $106 million of net charge-offs related to our CRE office portfolio, and our annualized net charge-offs to average loans ratio was 33 basis points. Our allowance for credit losses totaled $5.4 billion or 1.7% of total loans on June 30, stable with March 31.
Slide 15 provides more detail on our CRE office credit metrics. CRE office NPLs were stable in the second quarter as charge-offs and paydowns offset inflows to nonperforming loans. And the migration of criticized loans to nonperforming status is an expected outcome as we work to resolve the challenges inherent to this portfolio. As expected, net loan charge-offs within the CRE office portfolio increased and totaled $106 million in the second quarter. Ultimately, we expect additional charge-offs on this portfolio, the size of which will vary quarter-to-quarter given the nature of the loans.
As of June 30, our reserves on the office portfolio were 10.3% of total office loans and inside, of that, 15.5% on the multi-tenant portfolio. Accordingly, we believe we're adequately reserved. Importantly, we continue to manage our exposure down. And as a result, our balances declined 4% or approximately $300 million linked quarter.
In summary, PNC posted a solid second quarter 2024, and we're well-positioned for the second half of the year. Regarding our view of the overall economy, we're expecting continued economic growth in the second half of the year, resulting in real GDP growth of approximately 2% in 2024 and unemployment to increase modestly to slightly above 4% by year-end. We expect the fed to cut rates 2 times in 2024 with a 25 basis point decrease in September and another in December.
Looking at the third quarter of 2024 compared to the second quarter of 2024, we expect average loans to be stable, net interest income to be up 1% to 2%, fee income to be up 1% to 2%, other noninterest income to be in the range of $150 million and $200 million, excluding Visa and securities activity. We expect core noninterest expense to be up 3% to 4%. We expect third quarter net charge-offs to be between $250 million and $300 million.
Regarding our full year guidance, for ease of comparability to prior guidance, we exclude the first quarter FDIC special assessment as well as the second quarter Visa gain and other significant items. Considering our reported first half operating results, third quarter expectations and current economic forecasts, our full year 2024 guidance is as follows.
For the full year 2024 compared to full year 2023, we expect average loans to be down less than 1%, which equates phenomenal loan growth in the second half of 2024. We recognize the potential for greater loan growth, and should that occur, it'll be accretive to our full year average. Despite lower expected loan volumes, we expect full year NII to be at the better end of our previous expectations or down approximately 4%. We expect our securities repositioning and better-than-expected deposit dynamics to offset the impact of the lower-than-expected loan volume.
We expect noninterest income to be up 3% to 5%, slightly lower than our previous guidance due to continued softness in mortgage activity and, to a lesser extent, loan-related capital markets fees. As a result, total revenue is expected to be down 1% to 2% and inside the range of our previous guidance. We now expect core noninterest expense to be down approximately 1% versus our previous guidance of stable, in part due to our increased CIP target, and we expect our effective tax rate to be approximately 18.5%.
With that, Bill and I are ready to take your questions.
[Operator Instructions] Our first questions come from the line of Betsy Graseck with Morgan Stanley.
So on NII, I know you guided to the upper end of the range, even though you've got slower loan growth, clearly due to your NIM improving. At least, that's one driver. There's others as well. I just wanted to understand how you're thinking about the securities restructuring from here. Is this something that you would consider continuing? Or is it -- we should look at it as a one-off from using the Visa gains, and I ask just from the context of trying to think through NIM trajectory from here.
You should think of it as a one-off. I mean you never say never, and I don't now what the future holds. But practically, at this point, we don't have to do any restructuring on anything to hit that stated goal of the '25 record NII.
And we don't have any plans to do that.
Yes.
Okay. Great. And then could you speak to how you're thinking about deposit pricing and levels? I mean, clearly, there was tax-related outflows and things like that this quarter. And with loan growth being muted, should we be anticipating deposits stable to down? Or are you going to be out there trying to get deposit growth? Just again, asking from the context of how we should think about deposit pricing as we work through our models.
Yes. Sure. Sure, Betsy. I would say the short answer to that is stable to down is our expectation with an emphasis on stable, and things have really stabilized year-over-year, as you know. So our expectation is some downward drift, but not anywhere near the levels that we've seen in the last couple of years.
Our next questions come from the line of John Pancari with Evercore ISI.
On your NII outlook, it's good to hear the NII inflection and the confidence there. Excluding the $70 million benefit from the securities repositioning in the back half of this year, I mean, it appears that the underlying NII run rate for the back half was guided a bit lower. Can you -- is that mainly loan growth that's the driver? I mean, if you could just talk through that a little bit in terms of the factors impacting that run rate.
It wasn't -- if you backed out the restructuring, that would still be higher. And we did that while muting our loan growth assumption. And we did that because we kind of just got tired of saying that, hey, loan growth is going to come at some point. So we took it out of the forecast. If it shows up, we'll benefit like everybody else.
And I think that's an important point. That's a big difference in this quarter. We've changed our guidance for average loans to be up 1% or approximately 1% for the year, John. So as you can see now, down less than 1%. We don't control that. There's a basis for some loan growth in the second half of the year. But the important point is we've taken it out of our guidance, and our NII improves at the better end of the previous guidance, not just due to the securities restructuring but also the positive deposit dynamics and so forth.
Okay. All right. And then just separately on the capital front, clearly, the AOCI benefit from the securities repositioning is certainly noted. How does that -- how do you feel now in terms of the pace of buybacks as you look out, just given where you stand now on CET1 and from a fully phased in? How does that make you feel about the pace of buybacks, you're going to remain at the $100 million pace per quarter or possibly accelerate?
Yes. I mean, right now, we're on pace, and we continue to -- we expect to continue the pace that we've been on for the first couple of quarters. And as you know, the new rules are still in flux. So there's not finalization there.
And then beyond that, I think a driver will be what happens with loan growth, which would be a factor in terms of that being our highest and best use of our capital. But that'll be a factor in terms of deciding on buybacks. But the important part is that we are buying back shares.
Yes. I think, John, just on buybacks. I mean, at some point, I got to believe loan growth comes back. But to the extent it doesn't, we're generating a lot of capital, obviously, in excess of our dividend, and we'll face that question. If we're not using that capital for loan growth, should we accelerate deployment in buybacks? We're not there yet, but that happens down the road if loan growth doesn't materialize because we're generating a lot of capital.
Our next questions come from the line of Erika Najarian with UBS.
Just going back to Slide 9. I presume that the stabilization in deposit rates paid, which is quite notable, as part of the upgrade of the core NII guide even without the restructuring. And you answered, Rob, Betsy's question, I gather, on a balance standpoint. But perhaps give us a sense on how you think deposit rate paid will trend from here and maybe under the scenario of rates staying where we are versus the scenario of what the forward curve is pricing and how quickly you may be able to reprice.
Yes. Sure. Our plan -- so Slide 9 is a good slide, and it clearly shows a decline in the increase of the rate paid. The short answer to one of your questions there is we do expect the rates may -- rates paid to drift up a little bit but, in contrast, more like a handful of basis points versus the contrast to the previous quarter where you see 60 or 50 and even 30 in recent quarters. So it slowed down considerably. That's our expectation in the short term, Erika.
When we get into rate cuts, we'll see. We'll be able to move pretty quickly on the high rates paid on commercial and wealth. But we still do have these interest-bearing consumer deposits that are below market that will grind higher. So that's something that we've talked about before and to something that we'll need to keep our eye on.
Got it. And my second question is -- refers back to Slide 6 in terms of the forward starters. When I look back at your 10-Q disclosure, it seems like you're largely neutral to interest rate. And I know that you and Bill have talked a lot about the different factors that drive the inflection point and the Nike Swoosh. I'm wondering if the addition of the $18 billion in forward starters with the received fix of 4.31%, does that impact the magnitude of the Swoosh for the -- for 2025?
That's a good question.
Well, my answer to that would not necessarily be the magnitude, but the certainty. So essentially, what we've done is locked in some of the Swoosh.
Yes, probably 50 basis points. Okay. One of the issues, of course, when everybody talks about fixed rate asset repricing is what is it repriced to, and of course, therefore, we are exposed to whatever that 5-year rate is a year and 2 out. And those forward starting swaps simply, but a very opportunistic point, locked in materially higher rates than where we are today. To Rob's point, that's just locks in the certainty of what we'll be able to produce on a go-forward basis.
No. Got it. Bill, I think that's such a good point because I think when people are taking a fixed asset repricing, sometimes they misthink about the 5.25 as opposed to whatever, it could be at 4, right, by the end of next year. And to that -- to your point, you've locked into...
Yes.
Our next questions come from the line of Scott Siefers with Piper Sandler.
Rob, I was hoping you could maybe touch on sort of major fee components in light of the softer expectations. I mean, it sounds like it's just -- or mostly a function of mortgage, which sort of is what it is. Just curious to hear sort of what do you think is going well, what will need heavier lift, that kind of thing.
Yes. It's mostly a refinement, Scott. So for the full year guide around the fees, we lowered our expectations of increase, as you know, from up 4% to 6% to up 3% to 5%, so still up and a small shift. Most of that coming from continued softness in mortgage, which we expect to be on the -- continue in the balance half -- or second half of the year, a little bit less than what we were expecting, to a lesser extent, tied to the reduced loan guidance. We do have loan-related fees within our capital markets segment, think loan syndication. So generally speaking, if there's fewer loans, there'll be fewer loan syndication fees. So that's just a direct correlation there to that guide.
Again, we could see loan growth. And if that's the case, then those fees would come back. But that's the general thinking. Everything else on schedule, so to speak.
Okay. Perfect. And then I wanted to ask a little bit of a kind of fine-pointed one on loan growth. I think, Bill, in your sort of prepared remarks, you noted the introduction of first new credit card in awhile as well as planning to introduce more. Can you sort of contextualize your aspirations for that business and the sort of the path to get to over time?
Yes. I mean, basically, we want to have our fair share of consumer lending products with the clients we serve in our traditional DDA and other products, and we don't today. We're there in home equity. We're probably close in mortgage. We're underpenetrated in auto and in card. And in card, in particular, we just haven't had good offerings. We've had [ still ] technology. We've had slow -- we weren't -- we need to improve, and it's an opportunity for us.
Our next questions come from the line of Ebrahim Poonawala with the Bank of America.
Maybe, Rob, just -- it looks like you've locked in a lot of asset repricing. As we think about where the NIM should normalize relative to the 2.6%, give us a sense -- I mean, you probably have this number. Do we hit 3% at some point next year in terms of what the normalized rate would be? And can we get to a 3% plus NIM next year, even with maybe 4 or 5 rate cuts?
Sure. So we don't necessarily provide NIM guidance because it's more an outcome than anything. But to answer your question, we've operated in, call it, a normal environment at a 3% NIM margin. So if we -- we definitely expect to go up into '25. If we approach those levels, it won't be like we haven't been there before. So it's reasonable.
Got it. And just one quick one on credit quality. I think I heard Bill say not a whole lot ex-CRE office. But give us a sense if you're seeing any cracks within the C&I customer base from the prolonged period of like just higher-for-longer rates. Just how do you handicap the risk of a downturn or a recession over the coming months or the next year?
Yes. So when we take a look at our total reserves on our total portfolio, CRE, office aside, things are pretty stable. Maybe on quarter-to-quarter basis, consumer is a little bit better. Commercial non-CRE is a little bit worse, but not bad. So definitely some more movements, some downgrades reflecting the higher rates, slower economic activity in our commercial book, but no patterns or any themes to point out.
Got it. And outlook for reserves is stable from 2Q.
Reserves are stable, yes.
Our next questions come from the line of Bill Carcache with Wolfe Research.
Following up on your NIM and NII commentary, is there a point, as we start to get cuts, where you would start to worry that those rate cuts would potentially begin to negate some of the repricing benefit?
And then separately, amid the debate over whether the curve's going to steepen or flatten, depending on the outcome of the election, maybe could you just give us a little bit of a perspective on how PNC is positioned for either a flatter or a steeper yield curve environment.
Sure. We're largely indifferent. I mean, at the very, very margin, we benefit when the fed cuts rates from a floating rate standpoint. Of course, we're exposed to the steepness of the curve because that plays in the how we reprice maturing fixed rate assets. And that's a variable. It's a variable for us. It's variable for everybody. It's one of the reasons we lock some of it in.
My own belief in our positioning is such that even though we would expect the fed to cut here, I think in the end, somewhat sticky inflation the fact that deficits matter, it's going to cause the curve to steepen out. So we lock some of it in. I don't feel terribly worried about the need to lock the rest of it in. But I think -- I just think we're in a good place. We're going to do fine.
Okay. That's helpful. And then on the asset quality side, Slide 14 shows that steady upward trajectory in NPLs, but the reserve rate is relatively stable to down slightly, as you mentioned. And so it looks like the loss content that you see in the portfolio is stable. It's certainly not rising despite the rising NPLs. Maybe could you speak a little bit to that? And are there any implications of loan repricing that you are concerned about? For example, would you expect any impact on the credit performance of your customers as their loans begin to reset to higher rates?
I mean, just quickly, the movement from -- particularly in office CRE, right, from criticized to nonperforming, related reserving and charge-offs, is all going as we've expected. That's the natural progression of that cycle. Nothing's changed. We're not surprised by anything. We're reserved for it.
Credit quality of corporate America as it relates to at what point do the people who have locked in fixed rates and loan rates start to have to pay more, ultimately, at the margin is going to impact the way we rate somebody. I think about multifamily as an example where higher rates have hurt coverage ratios. It's not going to cause those losses, but it's caused us to downgrade that asset class simply because the excess isn't there. I think that'll flow through to corporate America over a period of time as well, but I'm not particularly worried about it.
And I'll just add to that, our reserves are adequate. The increase in the non-CRE NPLs in commercial really was one single large credit that is in our business credit, fully secured loan, so...
Yes, not in the U.S.
So it's -- doesn't have a lot of loss content.
Yes.
Understood. Bill, if I could squeeze in one last one for you. I wanted to get your thoughts on the FedNow instant payment services, which has been getting some attention. Is there a fee opportunity there? I guess, what level of engagement are you seeing from PNC customers? Do you see potential for lower-cost instant digital payments disintermediating debit? Just be helpful to hear your thoughts on the overall risk versus potential benefits of that to PNC.
I don't think FedNow has any impact on PNC, to be honest with you. We've been active with real-time payments in the clearinghouse and the use cases, all the ones you can think about, from insurers who want to pay real-time claims in a disaster through to certain payroll capabilities through to Zelle, for example. And FedNow doesn't add or subtract anything to that opportunity.
The challenge you have with real-time payments, both at the clearing house and FedNow at the fed, is they're not networks. They are a rail to move money. And the distinction between that is a network has very clear rules, who's responsible for items that don't transmit the right way, who's responsible for fraud, who's responsible for returns on and on and on. And neither of those 2 networks purposely were built -- or sorry, neither of those 2 payment rails purposely were built to [indiscernible], which is [indiscernible] doing money, which is very different. So I don't value long term has much of an impact, to be honest with you.
Our next questions come from the line of Ken Usdin with Jefferies.
You guys gave us that great table last December with the repricing of fixed assets through 2025. And I'm just wondering, does -- how much carryforward will there also be through '26? Do we -- should we think about that kind of ratably? Obviously, it's been 6 months since you gave us that slide, but just wondering just how that rolls as we look further ahead.
Well, Tim, we're going to refrain from '26 guidance on the call here today, but it'll continue to increase. But the real change in the dynamic occurs obviously in the first and second quarter of '25 and then grows from there.
Okay. Yes. That's why I'm asking the building blocks question as opposed to NII question.
Sure. Yes. Sure, sure, sure.
Okay. Understood. And then on the expenses, so you guys have been doing a great job holding the line. And I just wanted to ask like it looks like there's a pretty decent ramp baked into the second half on expenses. And I'm just wondering like what influences that, because it seems like expenses will be growing faster than revenues in the second half so -- or certainly faster than fees. So can you just walk through -- is that conservatism? Is there some catch-up on investments that you're making? Any context on that?
Yes. Sure, sure. Now we've outperformed on the first half, no doubt about it, and we feel great about that. And that's one of the reasons why we increased our CIP goal and also increased our guidance for the full year expenses. In the third quarter -- it doesn't all happen uniformly.
In the third quarter, we do have some investments coming online, technology investments coming online that bring some depreciation expense. We've got an additional day, those sorts of things. So it's all part of the plan. It's just expenses don't fall uniformly throughout the year.
Okay. Got it. And then obviously as that plays forward and if NII is better next year, you can also afford more cost growth, but we'll hear about that later.
Yes. That's right.
Our next question has come from the line of Mike Mayo with Wells Fargo.
Similar to some of the others, maybe this is like the game of jeopardy. I think the answer is you have continued improvement program with expense savings going from $425 million up to $450 million. You have securities repositioning that's giving you a boost to NII for the rest of this year, and you have fixed asset repricing that helps your securities yield go up by 400 basis points. Your forward payment swaps go up by 180 basis points and a little bit some other things. So the answer is all those things are going in the right direction, yet you still have a guide for negative operating leverage for this year. So I guess, what is the question? Or why is that or you can't eke it out or what's going on? And why is it -- yes, yes, go ahead.
Yes. So keep with your jeopardy approach here, the question would be what's loan growth going to be in the second half.
Yes. So what's -- Bill, you're very adamant 3 quarters ago about loan growth. And look, if you get NII in your range even without getting loan growth, I think people would rather take that than not. But we're hearing all the -- the biggest capital market players are just gushing with their expectations that this is a big capital markets recovery, the world's back, everything else. H.8 data actually showed a little bit better. I think you might have underperformed the H.8 data this quarter on loan growth. So is it, a, that you're just being more prudent and conservative and you're not seeing the pricing that you want or, b, your mix is just a little bit differently or, c, maybe your team's not executing quite as well as you'd like them to do.
I think you're trying to read into this too hard. Look, we're basically on HA, maybe a little soft on consumer because our card book didn't grow. When C&I comes back, traditionally, we'll do better. We've been actually adding DHE. They're just not drawing, and we're winning clients. All we did, Mike, was this whole notion of if we're giving guidance on the expectation and some crystal ball that says there's going to be loan growth when, thus far, we don't see evidence of it, we just took it out. If it shows up, then it's additive to everything we do. And we certainly aren't underperforming. We're winning clients at a pace that we never have. So it's literally this notion of when do they draw on lines and we just put -- we got tired of talking about it. When they do it, we'll benefit, and it'll add to all of those numbers that you're looking at.
And any meat on those bones about customer acquisition? You did mention 51% loan utilization. That seems a pretty low level versus 53% a year ago and 55% historical. So I guess that would back up what you're saying. But how much are you growing loans? You expanded to so many MSAs and implemented teams and did all that stuff that helps sometimes, and other times, it doesn't help as much.
Yes. I don't -- Rob, do you know DHE number?
I don't know off the top of my head, but...
We've grown exposures, and we've won clients at a pace well beyond, particularly in the new markets, but overall, well beyond what we've managed to do historically. We ought to and we will produce some of those metrics for you.
Yes. No, that's all good. And just to add to that, Mike, CapEx sales, as we said in our opening comments, CapEx sales ratios are low. Inventory levels are low. So there's just -- there's a lot of pointing to loan growth. It's just we don't control it.
And just last follow-up on that because, Bill, you've been around for a while and, Rob, the disconnect between what we're hearing and seeing in the capital markets and that activity picking up versus the still subdued loan growth, as you say, CapEx, inventory are lower, it just seems CEO confidence is up, people ready to do all sorts of things, yet when the rubber meets the road with you guys, you're just not seeing it that much.
You're trying to isolate us, and we're not isolated. I would happily tell you loan growth is going to be 2%, which is what all our peers are going to say. And if they hit 2% -- if we hit 2% or sorry, if they hit 2%, then we'll hit 2%.
Or maybe a little better.
Yes. It's -- I just -- I don't see anything suggesting that's going to happen. So maybe -- I mean, what would you rather have us do here, put in our forecast a we-hope-this-happens number or just give you numbers that we know are going to happen.
No. I understand. Under promise, never deliver, it's what you try to do. It's just -- in the past, you said at this stage of the cycle -- and historically, you've seen loan growth come back. So it sounds like the cycle might be -- it might be a little bit different. It might not be.
Yes. I think I've spent a lot of time pondering this, Mike. I don't -- look, at the margin, it's going to be that the cost of holding inventory, right? Just the cost of that drawn revolver is big time on the radar of corporates who are managing their own profitability. If you can run a lower inventory, your interest rates go way down when fed funds is 5.25%. So I think that's part of it.
And I think this whole uncertainty as we come up into the election on what's it going to look like from a regulatory basis, what am I allowed to invest in? Am I going to get it approved, all of that, there's a lot of pent-up energy behind that, and we'll see. But I don't know. And it literally was this thing of rather than keep guessing and wishing, if it happens, it's a great outcome, but we don't need to rely on.
[Operator Instructions] Our next questions come from the line of Matt O'Connor with Deutsche Bank.
Bill, I haven't heard you guys talk too much about credit card. You mentioned a new product and some more coming. And just thoughts on kind of strategy for card going forward and the targeted customer and then any interest in acquiring portfolios, which has not really been on the radar in the past.
No. We're not going to acquire portfolios. The product that we have historically offered our existing clients and the service levels, websites, processing that went along with it were less than what we aspire to. We have an ability to get higher penetration with our existing clients, offer them better products, have better technology. Historically, we prioritized tech investments inside of our core retail space, so think online mobile real-time. And we just haven't put the same energy, although about a year ago, we started to, into what we do in credit card. Some of that is service technology, ease for customers, application, all of that stuff. Some of it is just getting better approvals. And we're not going to change our credit box, but we're missing a lot of clients who are in that credit box because we make it too hard for them.
Yes. We're -- in simple terms, we're just underpenetrated relative to industry averages, nothing hugely aspirational other than just to have our fair share.
Yes.
Yes. That made sense. And then just separately, I think you still have half of your original Visa stake. And what's kind of the plan on that? And I assume that's in the $750 million range mark-to-market for Visa net of hedges and stuff like that. But just frame what's left and the timing of it.
I'm sorry, I missed the front part of that question.
Visa.
Visa.
What happens with the back half, so the 50% that we did not have the ability to monetize. Well, Visa controls that schedule. Some of it's reliant on the litigation resolution, and some of it's reliant on the schedule they've laid out, which is sort of a multiyear exchange. So we'll just continue to monitor it.
Our next questions come from the line of Gerard Cassidy with RBC Capital Markets.
You guys had a good fortune of having insights into the commercial real estate business through Midland, your CMBS servicer. Can you give us some insights and color on what Midland is seeing in terms of their pipeline of increased special servicing, which, of course, I know, has higher revenue, but more importantly, maybe directionally shows us where credit is heading?
Yes. That's a good question, Gerard. Ironically, their special servicing balances, actually, went down in the quarter, which is a little bit of a head scratcher. We don't think that's necessarily indicative of a trend. We do expect it to continue to go up. But from the start, and I think you've asked this question before, it's been much, much slower in terms of those increases, those balances than you would've expected.
Yes. And there, I went through forecast on sort of expectations on maturity bubbles and property types, and we don't expect that balance. It's not going to grow at the pace that intuitively you might thought of.
Yes. And that we thought a year ago.
Yes. Yes, because things are getting cured. They're getting sold off pretty quickly. There's -- for things that are really bad, there's still a lot of capital in the market. So they're turning it faster than perhaps we would've thought.
Are they seeing any change in the product? Is this still primarily commercial office? Or is it moving into any of the product areas?
It's mostly office.
It's interesting. It's all of the above for all of the historical reasons. So there's still a little retail. There's hotels that'll show up in there. There's multifamily that is in the multifamily that went to Freddie, Fannie. And then increasingly, it's office, and the bubble down the road looks more like office.
Yes.
Got it. And then just on your commercial real estate in the Slide 15, you give us obviously good detail, and you've always told us about this multi-tenant office is the issue. It looks like -- obviously, with 52% criticized, how far are you along in analyzing or reviewing that portfolio? Are you completely through it and now it's going the second time? Or any color there?
We've analyzed.
I mean, we're completely through it every quarter. I mean, a couple of things. I don't know if we put this out there, but there's actually not that many loans. So we don't have thousands of small loans. These are typically larger loans, and so we've gone asset by asset. And as anything gets close to being troubled, we look at 3 different appraisals, one of which is our own self-generated using more extreme, negative assumptions than what you might get from a commercial appraiser. We use higher vacancy rates, higher interest rates, longer time to lease up, higher cost rehab, all that other stuff in our valuation. So we go through this. We know all the properties. We keep looking at them. We know it's going to happen to them. We know the time lines. Look, it's not a great outcome, but there's nothing in there that I think is going to surprise us.
Very good. And just one last one on this, Bill. Geographically, are you guys finding certain parts of the country weaker than others? I know there's a lot of talk about the big urban markets, Class B and C buildings. How about from your vantage point, what are you guys seeing geographically?
It's not -- it's property by property, right? You could be in a lousy city but be in the right place and do fine. So I just don't know that it matters.
As it relates to our portfolio, for sure.
There are no further questions at this time. I would now like to turn the floor back over to Bryan Gill for closing comments.
Well, thank you all for joining our call this morning. And if you have any follow-up calls, feel free to reach out to the IR team, and we're happy jump on the call with you.
Thanks, everybody.
Thank you.
Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.